Jones: California Workers’ Comp Filings Show Companies Using Advisory Rates

By | January 19, 2012

A majority of companies are using California Insurance Commissioner Dave Jones’ approved advisory pure premium rates in their rate filings for 2012, and the result is a combined increase of 2.8 percent for companies, according to Jones’ office.

On the face of it, the small increase and improved guidance from Jones are a win for the commissioner. But in the end, what Jones’ assessment of his advisory rate may boil down to is the age-old chicken and egg controversy: Are carriers using Jones’ advisory rate, or is the rate merely a better reflection of what carriers were going to file anyway?

Jones issued the statement about the rate earlier this week, announcing that the California Department of Insurance has reviewed workers’ compensation insurance rate filings from insurance companies in “response to the commissioner’s advisory pure premium benchmark determination.”

The pure premium benchmark is an estimate of the costs for workers’ compensation claims benefits and expenses approved by the commissioner that insurance companies may use in their rate filing, however Jones does not set workers’ compensation insurance rates.

“This past year we improved the pure premium benchmark process by establishing a benchmark based on what is happening in the market,” Jones said in a statement.  “In November, I announced the approved advisory pure premium benchmark that would be effective in 2012. A significant number of insurers, representing a significant share of the overall market, are using the approved advisory pure premium rates.”

According to CDI, most of the top 100 companies that make up 96.7 percent of the California workers’ compensation insurance market are using the pure premium rates in their rate filings. The actual overall change in pure premium rates based upon all rate filings received from insurers resulted in a combined increase of only 2.8 percent for all companies, according to CDI.

In November, the Workers’ Compensation Insurance Rating Bureau filed to change the way the state’s workers’ compensation pure premium rate is calculated. The advisory claims cost benchmark was set at $2.30 per $100 of employer payroll. The rate became effective Jan. 1.

Twice a year WCIRB advises the insurance commissioner on how costs are developing within California’s workers’ comp system and the commissioner then advises insurers whether they should raise, lower or maintain rates.

The WCIRB filing provides greater information on current insurance company rates and pricing than previous filings, according to Jones and others who have pushed for the new benchmark. Insurers are charging employers insurance premiums close to the estimated cost of benefits and adjusting expenses, according to them.

However, insurers filed much higher manual rates, the rates that could be charged to employers, and are substantially discounting those manual rates. This has helped to keep workers’ compensation insurance prices generally stable despite increasing costs, particularly for medical care, according to Jones.

The move to restructure how the state’s workers’ compensation pure premium rate is calculated was supported by the Association of California Insurance Companies.

“I think that the adjustments that he made in the pure premium rate process were positive, because the previous pure premium benchmark was not adjusted for three years,” said Nicole Ganley, a spokeswoman for ACIC.

The advantage of the change is the rate is more realistic, and “it shows the true cost of the system,” she added.

“Insurers take that rate and apply it to their book of business, to see what’s best for cost,” Ganley said, adding, “we definitely think that the recalibrated pure premium rate better reflects what insurers are charging in the marketplace and it’s more transparent.”

But to whether insurers are following the advisory rate, or if the rate just reflects what insurers were going to file anyway is a question that remains unanswered.

Jon Axel, senior vice president and producer for HUB International of California Insurance Services Inc., believes rates are largely being based on each carrier’s own experiences and on individual class codes more so than on the pure premium rates.

And he says he’s seen rates have gone up.

“I think that each carrier is going to be basing their rates on their own experience,” Axel said. “In some cases we’ve seen a lot larger increases, and some cases we’ve seen not so much. I don’t see how (the pure premium advisory rate) correlates with what the carriers are filing.”

Axel added, “We’re seeing generally an overall rate increase.”

Derek Ross, president Kulchin Ross Insurance Services Inc. in Tarzana, Calif., also deals heavily in workers’ comp. Ross, too, has seen some increases, but he believes that rates are overall flat, or even down in some cases.

“What I’ve noticed, on some of my renewals is that they’re basically coming in flat,” he said, adding in that some instances they “may see some slight rate increase, maybe 5 percent maybe 10 percent.”

However, he said, “I didn’t’ see any major change for this upcoming renewal cycle.”

As for the pure premium rate’s effect on actual rates? “I wouldn’t say that they were affected,” Ross said.

He also noted that carriers can figure in scheduled credits, which can impact rates positively or negatively more so than the advisory rate.

Ross said he advised his clients last year to expect an increase to prepare them for the worst in a system that can often deliver bad news to all parties involved.

“We’re kind of seeing that flat-to-10% rate increase, which is good,” he said. “It could be a whole lot worse, because the overall combined-loss ratios are horrendous.”

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